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Cities for development
Tony Venables, Oxford & IGC
• 2.7 bn new urban dwellers by 2050 -- 1.4 mn per week • India, 200k per week 2001-11 • Africa, 350k per week projected
• Africa 1/3rd way through its urbanisation process
• Cities will have to deliver: • Productivity: long run economic growth will be driven in cities • Liveability: housing and services
• Cities are complex: intense economic and social interaction • Huge benefits – and potential costs
• Cities have three sorts of components -- stocks of structures – Residential: housing
– Business: workplaces -- jobs and productivity
– Infrastructure: transport systems, utilities, public services
• Urban form: interaction of these components according to their location, quality...
• Workers get to jobs: Work-places have access to markets, inputs, land: Households access amenities, services...
• How are the components coordinated?
– Markets: especially land – the scarce factor; housing
– Public investment: infrastructure, utilities, public services; housing
– Regulation
• Plan of talk
– Framework for seeing how the component parts fit together
– Discuss each of the three components in turn
– Draw policy conclusions
Cities for development
Framework: the basic (monocentric) urban model
Population (=density/ area)
CBD
Commuting cost
wU
Total rent
Total commuting cost
w0
$ per worker
T/D
– City is residences/ workplaces/ infrastructure, spread around a centre.
– Jobs largely (?) concentrated in the CBD
– Residential areas spread around (horizontal axis)
– City jobs offer productivity & wage WU
– City draws in workers : outside wage W0
– City grows as WU> W0 but urban costs increase with city size.
– Commuting costs of workers increase the further they are from the centre.
– Equilibrium city size: marginal (edge) worker indifferent between W0 and WU minus commuting cost
Framework: the basic (monocentric) urban model
Population (=density/ area)
CBD
Commuting cost
wU
Total rent
Total commuting cost
w0
$ per worker
T/D
– Messages: • Cities create economic surplus as they are productive, WU> W0.
• Some of this surplus dissipated in commuting (and other) urban costs
• Remaining surplus is urban ‘rent’
• Rent gradient from CBD to edge density gradient CBD to edge.
• Surplus is greater the lower are commuting costs (T) and the higher is density (D) [NB – need to net out construction costs]
– Issues: • Residential: what are the barriers to achieving high density and acceptable quality housing?
• Business: what determines urban productivity, WU? What do people in cities do?
• Infrastructure: where and when to build, and how to finance?
But first, look at some cities, in particular density
Urban form: employment density
5
Urban form: residential density
6
Urban form: residential density
7
Urban form: residential density: Asia is dense
8
Urban form: residential density
500 per ha = 50,000 per km2 9
10
Brasilia
Johannesburg Moscow Urban form: residential density with non-market outcomes
Dar es Salaam 2002 2012
Nairobi 1989 1999
Includes Kibera
12
Dar es Salaam 2002 2012
I: Residential
Housing matters because:
• Well-being – family development – Attracting and holding skilled labour
• Access to employment & amenities – Importance of density
• High share of national assets - private and relatively dispersed ownership – UK - $5trn, 1/3 national wealth private residential structures.
• Direct job creation: construction – High domestic content – Labour intensive
Conditions for delivery of high density/ acceptable quality housing?
1: Property rights
• Need to be supportive of investment in long-lived structures • Land rights: privatized but not clarified?
– Often subject to multiple claims
• Barrier to capital investment, building tall • Difficult to consolidate blocks of land – needed for large scale projects • Hard to run property tax • Property as collateral: need clear title and ability to foreclose fast and efficiently • Rental tenancy
– Highly politicized
– Rent control / tenant protection undermine the market
Residential
2: Finance
• Need effective financial intermediation – Commercial Banks unwilling to lend – transactions costs?
• Need specialized mortgage finance? – Inflation:
• Makes mortgages unaffordable • Need indexation of principle and repayments?
– Policy undermining market: • Nigeria: govt offers 6% mortgages when inflation 18%.
3: Local infrastructure
• Road layout, sanitation: • Economies of scale • Who provides it? Private, public – or neither
Residential
4: Building regulations:
• Many good reasons for building & land use regulation – Building regulations and imperfect information – Matching density to infrastructure – Externalities of over-crowding
• But: many countries have regulations that are too tight: – Regulations ignored: bifurcated supply property difficult to value and trade – Floor area ratios (FAR, or floor space index FSI) that are very low
Residential
EG: Estimates of cost of FSI restrictions in Bangalore: (Bertaud & Brueckner, calibration of urban model)
• Restrictions bind over 24% of city
• Absence would have led to city with 10% smaller area
• Commuting saving 1.5-4.5% household income
• Further productivity benefits of denser city? – losses from ‘suburbanisation’ of commercial activity
5: Construction sector: • Need supply response from cost-effective construction sector • Input costs high?
– Land – Materials – Labour skills
• Lack of small/ medium firms?
Implications:
– Failure on some combination of these points mean that major part of residential property market is missing.
– Implications for both livability and density.
– Structures (and associated communities) are long-lived mistakes are long-lasting:
Residential
II: Jobs and production
What determines city productivity? What do people in cities do?
Concentration of economic (and social) activity brings high productivity
• Mechanisms: – Large markets allow economies of scale, linkages and clusters
– Thick labour markets – matching, learning, training
– Economic and social networks
– Knowledge spillovers
– Economies of scale in provision of power, utilities
• Evidence: -- from high income countries: – Large cities are highly productive
– Doubling city size increases productivity by 3 - 8% (Rosenthal & Strange survey)
– Berlin study – natural experiment: (Redding et al) 9-11%
– Source of innovation
– City-wide or sectoral?
• Implications?
– Productivity increasing with city size: positive reciprocal externality market outcome inefficient
– Reducing commuting cost/ raising density brings additional benefit by increasing city size and productivity: ‘growing a cluster’
– Possibility of low-level trap: coordination failure
hard to start ‘new’ cities.
primate city too large?
Jobs and production
Population (=density/ area)
CBD
Commuting cost
w0
$ per worker
Wu
Jobs and production
Accurate for developing countries? What do developing country cities do?
• Tradables vs non-tradables: – Tradables:
- ‘Export’ oriented, e.g. manufactures, services - Increasing returns to scale
- Non-tradables:
- Government, local services, retail, construction, informal sector services
- Demand for non-tradables come from: - Tax revenues - Resource revenues - Market activities for local areas/ entrepot trade - Government, local services, retail, construction, informal sector services - & from workers in NT and T sectors
- Likely decreasing returns to non-tradables:
- Inelastic demand price falls as supply expands
Jobs and production
• Evidence?
– High share of informal service sector activity in many developing country cities
– Low share of tradables linked to resource revenues (demand for non-tradables urban Dutch disease)
Gollin, Jedwab, Vollrath 2014
• Implications?
– Inelastic demand for non-tradables diminishing returns and downward sloping wage curve, WN
– Elastic demand for tradables + increasing returns to scale upwards sloping wage curve, WT
– At A the city is small but too expensive to support tradable production.
– If could get to B, would have tradable sector, larger city, higher real income.
– Possibility of being stuck in low level trap: ‘urbanisation without industrialisation’
Jobs and production
Population (=density/ area)
CBD
Commuting cost
WN
w0
$ per worker
WT
A
B
WU = max[WN , WT]
• Policy implications?
• Create urban locations that are productive access to workers/ markets / other firms
• Want to achieve equilibrium at B and prevent lock-in at A.
– Good central area transport high rents density – Encourage density: NB: Low density problem likely to be particularly acute if non-tradable activities are dispersed not concentrated in CBD – Importance of sequencing: hard to retro-fit a large sprawling city.
• Conclusions – African cities evolved as ‘local’ –
poorly designed to become ‘global’
Jobs and production
Population (=density/ area)
CBD
Commuting cost
WN
w0
$ per worker
WT
Commuting cost
A
B
• Broadly defined: – Productive capital: Capital investments in transport, water, sanitation, power, – Social infrastructure: schools, hospitals
• Public or private provision
– Local infrastructure: street layout, lighting – City-wide: transport networks, main water, sanitation
• Finance:
– Gains from city productivity get transferred to rents and capitalised in land values. – Land is the perfect tax base
• Fair – why should incumbent land-owners take the capital gains? • Efficient – a tax on pure economic surplus • Sufficient to fund infrastructure investments (only want to do investments with
benefit (increase in land values) > cost. – Implementation
• Land not structures • Timing: construction costs up front, rents through time
III: Infrastructure
• Selection of infrastructure projects (eg transport): What is benefit of particular project?
– Direct cost saving for existing traffic
– Value of traffic created
– Wider benefits: Facilitates agglomeration/ productivity
– Coordinating mechanism: commitment to future shape of city
– Private investment (& location decisions) based on expectations about future city
– Infrastructure to coordinate – create confidence (?) – for private investors.
– To play this role, infrastructure must lead not lag development.
• Ex ante appraisal and ex post evaluation
III: Infrastructure
Coordinating mechanisms and urban policy:
• Markets – Need well functioning markets – efficient allocation of land.
– But not the whole story: public goods, externalities, coordination failures
• Public infrastructure
– Direct benefits of service provision – transport, schools, health, garbage collection
– Enables clusters and productivity – ‘wider benefits’.
– Shapes and coordinates private sector investments – if leading not just lagging
• Regulation – Micro-level, building regulations etc.
– Macro-level: vision for growth of the city
• New cities – More cost-effective to build new than to retro-fit?
– African urban population will (at least) treble
Concluding comments